Breaking the bond: primary markets and carbon-intensive financing
To align capital flows with the goals of the Paris Agreement, financial institutions must decarbonise primary market transactions, as these continue to provide new capital to the real economy that can create carbon lock-in and the risk of stranded assets. In this paper we define a new metric, Primar...
| Main Authors: | , |
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| Format: | Journal article |
| Language: | English |
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Smith School of Enterprise and the Environment, University of Oxford
2021
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| _version_ | 1826304338059853824 |
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| author | Wilson, C Caldecott, BL |
| author_facet | Wilson, C Caldecott, BL |
| author_sort | Wilson, C |
| collection | OXFORD |
| description | To align capital flows with the goals of the Paris Agreement, financial institutions must decarbonise primary market transactions, as these continue to provide new capital to the real economy that can create carbon lock-in and the risk of stranded assets. In this paper we define a new metric, Primary Market Carbon Exposure (PMCE), as the proportion of primary market transactions that occur in carbon-intensive sectors. We calculate PMCE for US corporate bond exchange-traded funds (ETFs) and find that these funds systematically partake in carbonintensive primary market transactions, with a PMCE of 14% from 2015 to 2020, despite tracking indexes that rebalance monthly. High yield ETFs have a higher PMCE than investment grade ETFs and provide more financing to upstream oil & gas. To avoid becoming capital providers of last resort for carbon-intensive sectors, ETF providers need to reduce PMCE in line with Paris Agreement carbon budgets. For policymakers, not only can passive funds contribute to carbon lock-in, but ETFs directly bought by central banks are financing carbon-intensive sectors. We demonstrate this for ETFs bought by the Federal Reserve in 2020. |
| first_indexed | 2024-03-07T06:16:18Z |
| format | Journal article |
| id | oxford-uuid:f12fce49-c802-48cc-a7c9-29650f4e089c |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-07T06:16:18Z |
| publishDate | 2021 |
| publisher | Smith School of Enterprise and the Environment, University of Oxford |
| record_format | dspace |
| spelling | oxford-uuid:f12fce49-c802-48cc-a7c9-29650f4e089c2022-03-27T11:54:15ZBreaking the bond: primary markets and carbon-intensive financingJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:f12fce49-c802-48cc-a7c9-29650f4e089cEnglishSymplectic ElementsSmith School of Enterprise and the Environment, University of Oxford2021Wilson, CCaldecott, BLTo align capital flows with the goals of the Paris Agreement, financial institutions must decarbonise primary market transactions, as these continue to provide new capital to the real economy that can create carbon lock-in and the risk of stranded assets. In this paper we define a new metric, Primary Market Carbon Exposure (PMCE), as the proportion of primary market transactions that occur in carbon-intensive sectors. We calculate PMCE for US corporate bond exchange-traded funds (ETFs) and find that these funds systematically partake in carbonintensive primary market transactions, with a PMCE of 14% from 2015 to 2020, despite tracking indexes that rebalance monthly. High yield ETFs have a higher PMCE than investment grade ETFs and provide more financing to upstream oil & gas. To avoid becoming capital providers of last resort for carbon-intensive sectors, ETF providers need to reduce PMCE in line with Paris Agreement carbon budgets. For policymakers, not only can passive funds contribute to carbon lock-in, but ETFs directly bought by central banks are financing carbon-intensive sectors. We demonstrate this for ETFs bought by the Federal Reserve in 2020. |
| spellingShingle | Wilson, C Caldecott, BL Breaking the bond: primary markets and carbon-intensive financing |
| title | Breaking the bond: primary markets and carbon-intensive financing |
| title_full | Breaking the bond: primary markets and carbon-intensive financing |
| title_fullStr | Breaking the bond: primary markets and carbon-intensive financing |
| title_full_unstemmed | Breaking the bond: primary markets and carbon-intensive financing |
| title_short | Breaking the bond: primary markets and carbon-intensive financing |
| title_sort | breaking the bond primary markets and carbon intensive financing |
| work_keys_str_mv | AT wilsonc breakingthebondprimarymarketsandcarbonintensivefinancing AT caldecottbl breakingthebondprimarymarketsandcarbonintensivefinancing |